'Brexit clause' derails €1 bn of London real estate transactions

Many buyers are invoking a 'Brexit clause' to pull out of commercial property deals in London. Just in the last few days office and retail deals worth at least £850 mln (over €1 bn) have collapsed or are under review because of post-referendum jitters.

In the weeks and months leading up to the EU referendum in the UK many prospective buyers demanded a clause when drawing up a contract, that would allow them to walk away from the deal in (what then seemed like) the unlikely event of a vote for Leave.

'We are only doing deals in the UK if they have a Brexit clause,' Philip la Pierre, head of investment management Europe at Union Investment Real Estate, told a PropertyEU Investment Briefing last month. Now the German fund manager, which had made an offer of £465 mln at a yield of 4.75% to buy Cannon Place, a large office block in the City, has pulled the plug on what would have been one of the largest transactions in the UK this year.

The reason is reportedly the referendum result and the uncertainty surrounding the London office market, as there is an expectation many banks might relocate part of their offices and staff to cities in mainland Europe. Union Investment, however, said it remains committed to the UK market, where it owns more than £1 bn of real estate.

Another German company, KanAm, has decided not to follow through with the acquisition of the 1 Wood Street office block in the UK capital for £190 mln from Aerium and Korean insurance company Hanwha Life.

More question marks
There are question marks over the planned sale of One Cabot Square, an office tower in Canary Wharf, which the Qatar Investment Authority was selling for around £450 mln, and the property may be withdrawn from the market. AXA Investment Managers – Real Assets said it was ‘considering its options’ on the development of a skyscraper at 22 Bishopsgate in the heart of the City.

In the retail sector, Oxford Properties is reviewing its bid to buy luxury company Mulberry’s New Bond Street store from Aberdeen Asset Management for £200 mln. Outside London, US fund manager Apollo is considering pulling out of a deal to buy a shopping centre in Scotland, while the sale by M&G of Waverley Gate in Edinburgh for £70 mln might be called off if prospective buyers TH Real Estate invokes the Brexit clause.

Some buyers are walking away from deals without a second glance, while others are going back to the negotiating table to try and get a better price. Opportunistic investors are also ready to pounce, taking advantage of the deal and of the fall in the value of sterling.

'People may invoke Brexit clauses and pull out, but vendors still want to dispose of the assets, so they may accept 20% less or whatever,' said Alexander Fischbaum, managing director, AF Advisory. 'The Brexit clauses I have seen were very binary, allowing a clear walk away with a return of the deposit.'

Over £100 mln of deposit money is expected to be returned in the City alone.

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